How to Use Robinhood Without Losing Your Shirt
As WSJ columnist James McIntosh recently pointed out, the best performing stock last year was priced below $ 1, which is odd because the stock price tells you almost nothing about the company. This market behavior coincides with the recent rise in the number of individual investors using trading apps, with users flocking to Robinhood for its ease of use – but is the app too easy to use? Do amateur traders know what they are doing?
Gamification of exchange trading
The benefits of democratized trading cannot be dismissed, but it runs counter to the fact that some people should simply stay away from trading apps. In a recent New York Times feature , research has shown that the smaller investors trade in stocks, the worse their performance is likely to be.
Robinhood, like other retail apps, allows people to buy and sell stocks and other, more complex trades. The problem with Robinhood is that, compared to other apps, it is a hotbed of aggressive trading, exacerbated by the way the app plays the role of the user. According to the Times :
- Robinhood users are more likely than any retail brokerage firm to trade the riskiest products at the fastest pace: in the first three months of 2020, they sold nine times more shares than E-Trade customers and 40 times more shares than Charles Schwab. … clients per dollar on the average client account for the last quarter.
- Robinhood users also bought and sold 88 times more risky options contracts than Schwab clients, compared to the average account size, according to analysis by research firm Alphacution.
- New members are given a free promotion as a welcome bonus, but only after they erase the images that look like a lottery ticket. Other features like falling confetti and emoji phone notifications make trading feel like a game.
- Initially, Robinhood only offered stock trading, but later added options trading and margin loans to maximize investment gains and losses. Customers who wish to use these exchange options only need to answer a few multiple choice questions.
- At the heart of Robinhood’s business is the incentive to expand trade. They do not charge a trade fee, but they will be paid more as customers make more trades, through a complex practice known as “ pay per order flow ”. This practice is used by retail brokers such as E-Trade and Schwab, but Robinhood makes significantly more money from it than they do.
Safe Tips for Using Robinhood
The golden rule of trading is never invest what you cannot afford to lose. Unless you are a seasoned trader who knows how to value a company based on its balance sheet, cash flow, market share, or management, you are probably better off thinking of trading as a gamble and applying the same precautions. Here are some tips on how to be responsible for your money . Otherwise, if you are interested in trading, Nerdwallet has a good overview of advanced day trading techniques that can help you avoid impoverishment in the long run.